Wednesday, April 07, 2010

SUMMARY:- Manufacturing news, new quarter money, jobs report are the Thursday drivers.- Stocks rally early, selloff, but then make a late comeback.- World manufacturing data shows solid improvement.- Leadership poised to move higher, e.g. semiconductors.- Small caps, next leadership already in place to rally to 161% extension ahead of earnings season.

Stocks try to give away early gains, but rebound to the close to post gains.

The trading week ended on Thursday, but all of the excitement is not over. The market is closed Good Friday with respect to stocks, but the jobs report will still issue. The bond market will be trading, and some overseas markets will be trading as well, but the US stock market will be closed. That does not mean it will not be an important day. While I will go into the specifics as usual with respect to the Thursday session, conclusions tonight are subject to change based on what happens Friday morning. I will likely be issuing a supplement to the report that details what the jobs report said and what it portends for next week.

On Thursday, there were three main items dominating the trade. First was the manufacturing picture from around the world. The US manufacturing did not come out until after the market opened, but it was solid (59.6 versus 56.5 prior; 57 expected). It was the best increase since July of 2004. Manufacturing is once again helping lead us out of the recession. This is not a great recovery, but it is not languishing in recession. It is languishing in terms of strong (or even mediocre) recoveries in the past, but after the bottom experienced in 008 and 2009, it seems like a breath of fresh spring air blowing through the country.

The US manufacturing data came on the heels of a triumvirate of excellent data from the rest of the world. Japan's manufacturing sector rose, and China saw its manufacturing sector surge. The European Union manufacturing sector jumped; indeed, it expanded at the fastest rate in 40 months. We are looking at recovery around the world in terms of manufacturing.

Naturally, that impacted all commodities. Steel was up, copper was up, materials were up. Industrials had a better day. Anything that had to do with the build out around the world enjoyed a strong day. The second item dominating the news of the day was the new money coming in for the new quarter. Even though it is April Fool's Day and the market tried to play a joke on investors, money still came in. Stocks were up premarket and gapped higher as the market opened. There was no problem with money waiting until next week to come in and bolster the current upside trend. Looking at an intraday chart of the SPY, there was a gap higher and a continued rise as the manufacturing data came in. The third factor driving trade on Thursday: the Friday jobs report. Initial jobless claims were out before the market, and they were roughly in line with expectations (439K versus 440K expected). The prior week was revised a bit higher to 445K from 442K, so there is still improvement. While a lot of people are crowing about these numbers as indicating job creation, the numbers point to extremely tepid job creation. You are looking at around 300K-350K to really make an impact on the non-farm payrolls. We may be eking out gains right now, but they are tenuous. 184K jobs are expected, revised down from 190K. The economists are pulling in their bets a bit and are concerned after the ADP number. The weekly jobs report on Thursday helped to mitigate some of those fears, but not entirely. There is still a 9.7% expected unemployment rate. If people are feeling more confident and going back into the market, that means it would rise because there are not enough jobs to take on everyone coming back in the market. I will also be interested in the average workweek. It is expected to tick up to 33.9 from 33.8. It is very important that it continues to rally.

Back to the Friday non-farm payrolls and the impact on Thursdays trade. Looking at the chart intraday, you can see how the worry about the jobs report on Friday impacted the day. The indices rallied, but it was not even mid-morning when they hit their zenith after the ISM data. There is the spike higher and then the reversal, and that led to the selloff that accelerated as the afternoon wore on. There was a late-afternoon rally in the last hour and a half of trade that pushed the indices back to positive. NASDAQ and the growth indices had turned negative, and it pushed them back to positive and they closed with decent gain. It was not anything spectacular. There is a fight between the buyers and sellers. A lot of that had to do with the long weekend and the jobs report coming on a day when the market will be closed. It also had to do with new money coming in and the fact that the markets have rallied a long way. Some were ready to try to sell them off. At the end, that left the indices right in their range and picking up a bit of upside to make new closing highs on SP500. They are holding their range and holding their gains at this point. That is a good indication after last week when there was a intraday reversal on high volume on Thursday. More of the tale will be told next week when investors get back from the Easter holiday. We will find out whether the market will test back down to the January peak or continue on with a lateral test and make the break higher. It could also reverse, but the indices are at the 127% Fibonacci extension. With that kind of momentum after a consolidation, it tends to continue up to the 161% level. I cannot assume that will happen I am just talking about probabilities as always.

Those three factors played butted heads all session, and in the end there were modest gains. The upside came back and the trend in place held the market higher. All in all, it was not a bad session and not a bad week given last week's intraday reversal. I talked about Monday and Tuesday being important for the rally and the consolidation attempt. After all this day-to-day volatility and the intraday reversal, it looked dicey. The market held up, however, drifted higher to end the week, and left itself in good position to continue higher or make a test and then continue higher next week.

OTHER MARKETS.

Dollar. After having one of its best weeks in a long time, the dollar gave a lot of it back this week. It tried to make a surge on Thursday, but it just was not happening. It was not the dollar's week, and it finished down once more (1.3585 Euro versus 1.3510 Wednesday). It had broken below 1.35 and was trading easily in the 1.34 range, but it was not able to make that move stick and is now back down. It is still in this range of support and above the trendline it started after breaking the long downtrend. I do not expect the dollar to break down; I expect an improving economy to continue to bolster the dollar. It has had a long downtrend. It is still in a recovery mode and is not showing a lot of wear and tear. It is surprising that it came back to test so immediately after this nice consolidation that matches the initial consolidation when the trend was broken. Strong surge, sold back, but it is still in a flag pattern. It looks like it could give dollar traders a point to enter on a move back up over the upper range line, or maybe all the way the peaks from March. The dollar is not in serious trouble but just had a tough week. Other currencies such as the Euro are doing better because there was better news coming out of the EU. There was no dire news out with respect to Greece, Spain, Portugal, Italy, Ireland, or the UK. I still expect the dollar to move higher.

Oil. I said oil would break out of its range, and it did. I am not playing the break to the upside, but we will let it test. When there is a break out of a significant range, there is a spurt and then a test. When it tests, you close out DUG. If the test holds and starts to bounce back up, then you go into the DIG or another oil proxy to play that move. Oil was strong ($85.10, +1.34). It bounced around a lot after the market closed, but it has officially broken out of its range no matter where you put the range line. Nice breakout, good strength. We let it make the test, and when it does, we will play it off that level. Oil is going to go higher as well as gasoline. I filled up all my gas tanks when it dropped a bit and now will watch it run higher.

Gold. Gold enjoyed a nice week. After selling off the prior week, it was all upside for gold ($1,126.40, +11.90). It is still in the pattern and still basing out after the strong run through December. For a longer term play, I am looking for what happens when gold gets back into this range whether it says around $1,145. I expect it to consolidate in the $1,145-1,150 range, and it may move laterally. When it makes a break higher, that is when you want to move in for the run up to the old high indeed, the old closing high at $1,215. Gold had a good week and is setting up for the break higher.

Bonds. Bonds sold back again on Friday. The 10 year closed up (3.86% yield versus 3.83%). One would anticipate bonds to sell as the economy improves, and that is what happened with the gap down. It is holding at the 200 day EMA, but that keeps the bond market below key support levels. That is what I am really watching here. It broke out of this range, and it may not be able to recover again. Bonds may be done for now, and we will see higher and higher yield and lower and lower prices.

You would expect higher yields because the economy is improving and because we are still printing a lot of money. There will be inflation. European inflation rose 1.5% in March that is a significant jump. We are printing as much money as they are, so we will likely follow them in the near future. Overall, the other markets are acting as you would expect in conjunction with the stock market on improving economic data. While there is not radical or dynamic improvement, it is a solid enough improvement coming off of that terrible low; there will be improvement across the board in all the markets. I said there would be a recovery, it is just the strength of the recovery and how dynamic it is. This one is not that strong, but it is still a recovery still. Coming out of the 1982 recession, at this point there were already over 1M jobs created. Now we are still losing jobs, but that is likely to change on Friday. We will probably create jobs, but will it have any longevity? There are 100K jobs for the census, 100K attributable to catching up for lost jobs during the bad weather, and maybe a few more thrown on top of that for general economic recovery. Will it show up again later in the summer after all the census workers are laid off? It remains to be seen, but we are in a nice, slow recovery.

TECHNICAL PICTURE

INTERNALS

Breadth. It was 3.1 advancers over decliners on the NYSE, and a mediocre 1.3:1 advancers over decliners on the NASDAQ. NASDAQ was definitely a laggard.

Volume. In the NASDAQ, volume was higher at 2.2B shares, and that puts it back above average. On the other hand, the NYSE saw a 20% decline in volume, back below 1B shares at 918M. Not a great showing. A cause for a lot of the volume on NASDAQ had to do with earnings issues for stocks. RIMM saw a big jump in volume as it gapped down on earnings problems.

CHARTS

SP500. The SP500 had low, below-average volume on a rise that saw it make a new closing high in the rally. There was no significant change to the pattern? It is still in a lateral consolidation and it rose with the trend ahead of the three-day weekend. Next week will tell whether or not there is a test back down to 1151 or just more of a lateral consolidation. It may even hold at the 10 or 18 day EMA before breaking higher and moving toward the 127% Fibonacci extension.

NASDAQ. NASDAQ enjoyed stronger volume, back up to average as it traded in a wild range on the session. It is holding rather flat on the close, managing to say above the 10 day EMA as it does so. NASDAQ is bumping at the 127% Fibonacci extension, and if it holds this lateral move and makes the break, that could run it up another 100 points to the 161% level at 2515. There is still plenty of upside if the probabilities hold.

SP600. The SP600 saw similar action. It is in a nice lateral test. This is a strong move, but there is a little volatility. There was a reversal, but it has held on nicely above the 18 day EMA and formed a flag pattern. The small caps are looking good, and they should be with the economy improving. I just wish there were more jobs and more small businesses coming online. The small caps are already above the 127% Fibonacci extension and have come back to somewhat test that level. They are ready to make the move up to the 161% level at 357. They closed at 363. They are at the point to move higher, and as they led the rest of the market to the upside, we could very well see the small caps take the point again next week and lead the other indices to the upside and the 161% level extension.

SOX. The chips have played catch up and done a good job of it over the past few weeks. SOX is moving laterally at the January peak, trying to break through. It tried to make the move on Thursday and was thrown back as it did over a week back, but it is holding above the 10 day EMA. If the small caps make the break, it could be that the semiconductor index makes the turn higher and follows. We have a play on the semiconductor index. If it makes the break higher, we will follow it in.

LEADERSHIP

Metals. MT gapped higher, and we are enjoying or position in that. FCX gapped away earlier, and it is still moving higher. I would like to get a shot at it on a test. Industrial metals were also performing well. BHP gapped over a consolidation range and made a new closing high. There was not a lot of volume, but it is making the move.

Industrials. Industrials were decent, but they were not huge. CAT posted a new high on this particular leg of the rally. TEX had a decent day as well, and it surged up on decent volume for the second day in a row. It still has to conquer the prior peaks, and it has not done it quite yet.

Energy. Energy enjoyed another good day. It is finally catching up to the oil price, although oil is at a new high and not all of these stocks are. CVX is continuing higher. APC broke to a new rally high on its own. There are nice moves happening. I was looking at some of the drillers; they have been gapping higher, and we will see how they set up after this initial move. DO is making its second day of gaps after the news came out that the Obama administration would open some of the offshore lands to drilling in the future. They may or may not be tied to cap and trade legislation.

Technology. Technology had a relatively difficult session. RIMM missed its earnings and was down. AAPL eked out a gain, but it was indecisive after a pretty strong week. GOOG has had its woes with China, but it looks like it is finding its feet and started to move back up.

Retail. Retail has been the juggernaut. After a lateral consolidation, ANN broke higher on volume. The buyers are still moving in. WSM had a strong move, a nice flag, and it is starting to break higher. That may present a play for us. BWLD had a strong break higher, cleared the January and February peaks, and it has now come back to test them. It is showing a big doji, reaching down and reversing on Thursday. If it gets a break, we might catch a play on this stock that tends to run rapidly when it gets its legs beneath it.

Semiconductors. LRCX tried to make the break. It was not the day for it, but it still set up nicely. NVLS tried to make the break, but it could not hold it on the day. It still set up nicely. BRCM also tried to make the break over the downtrend in the flag pattern, and it could not quite hold it. All of these look ready to move next week if the market decides it has had enough pullback and is ready to move. All of these stocks are in position to make that move. Looking at the leaders, and if they are ready to make the move, that gives insight as to what the market will do. Next week will tell the tale as to whether the indices will test further or make the next break higher. Semiconductors that have rallied as the semiconductor index bumped up against the prior high have already made pullbacks over the last week to two weeks. They are ready to make their move right now and ready to assume a leadership role if they make the break higher. We have plays on all of them and are ready to go. If they make the break higher, we will be in them. The rest of the market will follow, they will make the move up to the 161% Fibonacci extension, and then we will look for a more serious pullback. It will not be a major selloff, just more of a serious pullback that sets up something like the ABCD pattern. After a long run, a stock will set up that ABCD pattern that consolidates the move, shakes out some sellers, and then continues the run higher in the direction of the original trend.

THE MARKET

MARKET SENTIMENT

VIX: 17.47; -0.12VXN: 18.76; +0.44VXO: 16.16; +0.12

Put/Call Ratio (CBOE): 0.9; +0.09

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 48.3%. Lower but holding high levels near the 48.9% the prior week. On the rise overall though still below the mid to upper fifties from late 2009 on into January 2010 ahead of the selloff into February. This move started at a low of 35.6% in February, the lowest it has been since July 2009. Over the 35% threshold level below suggesting bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 19.1%. Bulls higher, bears continue lower, down from 20.5% and well off the 27.8% level on the high of this leg in February. Over 35% is considered bullish for the market, so still a ways off even though bulls are falling to a bullish level. Continuing the rise from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: +4.62 points (+0.19%) to close at 2402.58Volume: 2.201B (+0.56%)

Up Volume: 1.035B (-3.597M) Down Volume: 1.149B (-31.418M)

A/D and Hi/Lo: Advancers led 1.32 to 1Previous Session: Decliners led 1.65 to 1

There is a lot of economic data out, but all of it is somewhat in the shadow of the Friday jobs report. We will have ISM services, pending home sales (something that is always watched closely). There will be FOMC minutes and just how many of them are talking about raising rates. There will be continuing claims on Thursday along with initial claims. Those are the main reports that are out, but we will also have earnings to deal with. It is the start of April, so there will be more warnings, positive of negative. The first earnings will come out toward the end of the week. We have been taking positions moving into these results because stocks are showing gains. They were showing the queues to buy them even though we are getting closer to earnings. Even though earnings are just around the corner and we do not necessarily want to be heavily invested at that time, if stocks say it is time to buy, we will buy.

We may get that run toward earnings. Stocks have consolidated over the past two to three weeks. They are at the 127% Fibonacci level and ready to make the move up to 161% level. As we saw with the patterns in the semiconductor indices, they are ready to make the move. They want to run up ahead of earnings, so they could give that push toward the 161% level. What will drive it? They are anticipating earnings, but there is also the first-of-the-quarter money. Some of it came into the market on Thursday. Volume was up on NASDAQ, and it did start out with new money coming in. When everyone is back in the game next week, there should be more money put to work. That could be the catalyst along with these good patterns that generate the move up to the 161% level. If new money comes in on Monday and we see that will be the case if the jobs report is not a clinker and hurts the market, then we could definitely get the run up to the 161% level ahead of earnings. That would be the perfect scenario to rally up to that point, let the positions we took early this week make good moves, take some gain on them, and take some new positions in stocks like the semiconductors that are ready to move up. We already have plays on them ready to go. We will let them make their run and, if they do that, we are in position to take more gain ahead of earnings. We can book that gain and then, if the stocks are in good position and we feel like riding some of the plays through earnings, we can do that with a reduced amount of exposure. If they hit a home run and move higher, great. If they do not, we do not take the hit as hard and are still in decent shape and coming out ahead.

There are many factors converging right now that could send the market back up to the next resistance level at 161%. There is a new crop of leaders that have pulled back already and are in position to move higher. There are the small caps looking as if they will make a break higher because that index has already pulled back and looks like it is ready to make its move. New money is ready to come in. There has been the pullback ahead of earnings, and a lot of times stocks will run into earnings and the first week where, if good news hits, investors continue to bid prices up until they get their fill of good news. There is a saturation level, and then the market starts to fade back. By that time, we will have taken gain and will be in a lightened-up position having banked gain and enjoying the ride higher. We have the catalysts, and we will let our positions run. We will take new positions when the market tells us to do so. We will then enjoy the ride higher, take some gain before we get deep in the earnings season, and then probably get more of a pullback into something of that ABCD pattern. We will then see if it sets up, reloads, and does it all again. Have an excellent weekend.

Support and Resistance

NASDAQ: Closed at 2402.58Resistance:2412-2415 represents a series of peaks and lows in 2007, 20082453 is the August 2008 peak

Support:2382-2395 from 2008The 10 day EMA at 23952324-2370 is a range of resistance from early 20082320 to 2326.28 is the January high2319 from the September 2008 peakThe 50 day EMA at 23122292 is a low from January 20082273 to 2282 marks bottom of January 2010 lateral peak2275 - 2278 from the February 2008 and April 2008 lows2245 from July 2008 through 2260 from late 2005. 2210 (from September 2008) to 2212 (the July 2009 closing low)2205 is the November 2009 peak2191 is the October 2009 peak2177 is a low from March 20082169 is the March 2008 closing low (double bottom)2168 is the September 2009, intraday peak2167 from the July 2008 intraday low2155 is the March 2008 intraday low2143 is the October 2009 range lowThe 200 day SMA at 2125

S&P 500: Closed at 1178.10Resistance:1185 from late September 20081200 from the July 2008 low

Support:1170 is the prior March 2010 highThe 10 day EMA at 11681156 is the Sept 2008 low1151 is the January 2010 peak1133 from a September 2008 intraday lowBottom of the January 2010 consolidation 1131 to 1136The 50 day EMA at 11351119 is the early December intraday high1114 is the November 2009 peak is breaking1106 is the September 2008 low1101 is the October 2009 high1084 to 1080 (September 2009 peak)1078 is the October range low1070 is the late September 2009 peakThe 200 day SMA at 10611044 is the October 2008 intraday highThe August peak at 1040The early October 2009 closing low at 1025The early August intraday peak at 1018The November 2008 peak at 1006 closing 1007.53 intraday992 is the August 2009 consolidation low

Dow: Closed at 10,927.07Resistance:10,963 is the July 2008 low

Support:10,730 is the January 2010 peak10,609 from the Mid-September 2008 interim lowThe 50 day EMA at 10,56310,496 is the November 2009 high10,365 is the late September 2008 low10,285 is the late December consolidation peak10,120 is the October 2009 peak9829 is the September 2008 closing high9918 is the September 2008 peakThe 200 day SMA at 98759855 is the early September peak in its lateral range9835 is the late September 2009 peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.